PG&E's bankruptcy filing yesterday puts breathing room between the floundering utility and creditors nipping at its heels but also brings to the negotiating table an assertive - and potentially troublesome - new force: the U.S. Bankruptcy Court.

With the power to reshuffle PG&E's finances and perhaps raise utility rates through the roof, the court can straighten out a complex legal and political situation while ensuring the continued flow of gas and electricity to Northern California homes and businesses.

Over the course of the bankruptcy process, Davis and the PUC may find their control over how much the utility can charge ratepayers trumped by Montali's broad discretion.

And while PG&E has gained at least temporary relief from debtors, the judge may force it to explain why it has funneled so much money to its corporate parent while pleading for relief from financial straights.

"Looking at the magnitude of the problems here, this is not a case in which an easy solution is going to be found right away," said Kenneth Klee, a Los Angeles bankruptcy specialist whose law firm has represented power suppliers to PG&E. "It's going to take two years. Maybe longer."

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In its filing yesterday, the utility chose to proceed under Chapter 11 of the U.S. Bankruptcy Code, a section that allows a financially troubled business to freeze debt payments so that it can reorganize its affairs. While other types of bankruptcy filings seek to have a company's assets sold and creditors paid in full, Chapter 11 permits a company to continue operating while it creates a plan for paying off creditors.

The filing stops PG&E's existing creditors -- ranging from bondholders to independent energy suppliers -- from demanding payment or suing to take the utility's assets. It also allows PG&E to incur new debt by giving new lenders priority over existing creditors. And it gives the utility a chance to reorganize its business by, for example, selling property, merging with another utility, cutting back its operations or reducing its debt.

The reorganization plan is developed through negotiations with creditors, who form a committee to press their interests. The judge's role is to resolve disputes among creditors and PG&E, to approve transactions outside of PG&E's ordinary course of business and to authorize the final reorganization plan.

"The goal," said Professor Fred Lambert, a bankruptcy expert at Hastings College of the Law in San Francisco, "is for people to agree on a way create a healthy company."

One issue sure to provoke intense debate is how the proceedings will affect utility rates. Many experts say it is a foregone conclusion that rates will rise dramatically. The question, though, is whether the authority to set them will remain at the PUC or be transferred to Judge Montali.

According to Klee, a federal statute requires PG&E to operate its business in compliance with state laws, one of which says the PUC must set utility rates. In addition, a provision of the bankruptcy code requires the commission to approve any rate change that the judge authorizes in the reorganization plan.

A gray area emerges, though, in the period before approval of the reorganization plan. Theoretically, says Klee, the judge -- backed by federal supremacy -- could increase rates during that period, "but I don't think Montali will do it. He is a very cautious, thoughtful person, and I wouldn't expect him to take on that issue where a federal statute says the PUC sets the rates."

Other lawyers are not so sure.

While acknowledging the legal restrictions in federal law, San Francisco attorney John Hansen says PG&E could argue that the judge has the power to raise rates "if the only way to reorganize (the utility) is to allow it to charge rates comparable to what it costs to purchase power."

Hansen says he expects PG&E to move early in the proceedings to request a rate increase beyond what the PUC has allowed.

If the judge grants the motion, the result might severely compromise the PUC's control over the utility, but the state could still come out ahead in the bankruptcy proceedings.

Since the utility's troubles began, California has spent billions supporting PG&E by purchasing electricity for it. The state might argue that it will not continue the purchases or proceed with any other form of bailout unless the court orders it placed in front of all other unsecured creditors.

"The state might put itself in the position of getting paid first," explained Klee, "something it could not do outside of the bankruptcy proceedings."

Ratepayers, meanwhile, might also benefit -- and minimize rate increases -- by suing for a return of PG&E's payments to its corporate parent.

The lawsuit could proceed on two grounds. One would be that the payments violated the bankruptcy law's ban on transfers to a creditor within a year before the bankruptcy filing. The other ground would be that the payments were technically fraudulent because they left the utility without enough capital to survive.

To bring the suit, customers would have to intervene in the bankruptcy proceedings, either as creditors who gave PG&E security deposits or as parties whom the judge allowed to intervene. The state attorney general could also intervene on their behalf.

"These proceedings are not at all bad for ratepayers," said Klee, "They might just give ratepayers a judge before whom they could launch a lawsuit to get the money back from the parent."

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PG&E Chapter 11 Bankruptcy Basics Chapter 11 of the U.S. Bankruptcy Code allows a financially troubled business to postpone debt payments so that it can reorganize its affairs.

While other bankruptcy proceedings seek to have a company's assets sold and all its creditors paid, Chapter 11 gives businesses breathing room to continue operating while creating a plan for paying off creditors. Some key elements of the procedure:

-- It creates an "automatic stay" that stops existing creditors from taking action to recover money the company owes them.

-- It allows the company to borrow money by giving new lenders priority over existing creditors in getting paid.

-- The company typically acts as its own trustee, remaining in possession of its assets, although a court can appoint a trustee in cases of serious mismanagement.

-- The company has the exclusive right to file a reorganization plan during the first 4 months of bankruptcy. After that, creditors can file plans.

-- The process can take as little as 6 months, but more typically last from one to two years.